FacebookTwitterGoogle+RedditEmail

The Best Way to Balance the Budget

People in Washington have incredibly bad memories. The last time that the United States balanced its budget was just a decade ago. Even though this is not distant history, almost no one in a policymaking position or in the media seems able to remember how the United States managed to go from large deficits at the start of the decade to large surpluses at the end of the decade.

There are two often-told tales about the budget surpluses of the late 90s: a Democratic story and a Republican story. President Clinton is the hero of the Democratic story. In this account, his decision to raise taxes in 1993, along with restraint on spending, was the key to balancing the budget.

The hero in the Republican story is Newt Gingrich. In this story, the Republican Congress that took power in 1995 demanded serious spending constraints. These constraints were ultimately the main factor in balancing the budget.

Fortunately, we can go behind this he said/she said to find the real cause of the switch from large budget deficits to large surpluses. This one is actually easy.

In the spring of 1996, the non-partisan Congressional Budget Office (CBO), whose numbers are taken as being authoritative in Washington, projected that the government would have a deficit of $244 billion in 2000, or 2.7 percent of GDP. Instead, the government actually ran a budget surplus in 2000 of almost the same size. This amounted to a shift from deficit to surplus of more than 5.0 percentage points of GDP; an amount that is equal $750 billion given the current size of the economy.

The reason for picking the spring of 1996 as the starting point is that this is after President Clinton’s tax increases and spending restraints were all in place. It was also after all the spending restrictions put in place by Gingrich Congress had already been passed into law.

In other words CBO knew about all of the deficit reduction measures touted by both political parties and it still projected a $244 billion budget deficit for 2000. Furthermore, the changes to the budget in the subsequent years went the wrong way. According to CBO’s assessment, the legislated changes between 1996 and 2000 actually added $10 billion to the budget deficit.

The trick that got us from the large deficit projected for 2000 to the surplus that we actually experienced in that year was much stronger than projected growth. CBO projected that growth would average just 2.1 percent. It actually averaged almost 4.3 percent. Instead of ending the period with an unemployment rate of 6.0 percent, unemployment averaged just 4.0 percent in 2000.

It would be helpful if policymakers paid more attention to this history, since it should remind them that even if their primary concern is the deficit, and not economic growth and low unemployment, economic growth may still be the best way to reach their deficit targets. It is all but impossible to balance the budget when the unemployment rate is above 8.0 percent. By contrast, if we got the unemployment rate back down below 5.0 percent (where it was before the onset of the recession), we would get most of the way back to a balanced budget even with no additional changes to the budget.

If the deficit hawk crew could remember back to the 90s then they might be pushing more aggressively for measures to spur growth. This would include not only fiscal stimulus, but also more expansionary measures from the Federal Reserve Board. The Fed has consistently been restrained in its measures to boost the economy because the whining of the inflation hawks.

The budget hawks should realize that if they really care about deficits, the inflation hawks are their enemies. They should be pushing for more expansionary monetary policy ? steps like targeting long-term interest rates or even a somewhat higher inflation rate ? there is no reason that the Fed should not be pursuing this path, at least until there is some evidence of inflation posing a problem.

The Fed, together with the Treasury, could also be pushing for a lower dollar. A monetary policy that is explicitly designed to reduce the value of the dollar would provide a boost to net exports and thereby to economic growth.

Finally, if the Fed opted to hold the bonds that it has purchased through it various quantitative easing programs it could directly reduce the deficit. The reason is that the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore leads to no net interest burden to the government. If the Fed bought and held $3 trillion on government bonds, it would leave to interest savings of close to $1.8 trillion over the course of the next decade.

If the deficit hawks had better memories and a bit of creativity, they would be talking about items like faster growth and increasing the Fed’s holdings of government bonds. Unfortunately, our policymakers don’t do very well in either the memory or creativity department. Therefore we are discussing privatizing Medicare, block granting Medicaid and cutting Social Security. That’s Washington for you.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

September 24, 2018
Jonathan Cook
Hiding in Plain Sight: Why We Cannot See the System Destroying Us
Gary Leupp
All the Good News (Ignored by the Trump-Obsessed Media)
Robert Fisk
I Don’t See How a Palestinian State Can Ever Happen
Barry Brown
Pot as Political Speech
Lara Merling
Puerto Rico’s Colonial Legacy and Its Continuing Economic Troubles
Patrick Cockburn
Iraq’s Prime Ministers Come and Go, But the Stalemate Remains
William Blum
The New Iraq WMD: Russian Interference in US Elections
Julian Vigo
The UK’s Snoopers’ Charter Has Been Dealt a Serious Blow
Joseph Matten
Why Did Global Economic Performance Deteriorate in the 1970s?
Zhivko Illeieff
The Millennial Label: Distinguishing Facts from Fiction
Thomas Hon Wing Polin – Gerry Brown
Xinjiang : The New Great Game
Binoy Kampmark
Casting Kavanaugh: The Trump Supreme Court Drama
Max Wilbert
Blue Angels: the Naked Face of Empire
Weekend Edition
September 21, 2018
Friday - Sunday
Alexandra Isfahani-Hammond
Hurricane Florence and 9.7 Million Pigs
Andrew Levine
Israel’s Anti-Semitism Smear Campaign
Paul Street
Laquan McDonald is Being Tried for His Own Racist Murder
Brad Evans
What Does It Mean to Celebrate International Peace Day?
Nick Pemberton
With or Without Kavanaugh, The United States Is Anti-Choice
Jim Kavanagh
“Taxpayer Money” Threatens Medicare-for-All (And Every Other Social Program)
Jonathan Cook
Palestine: The Testbed for Trump’s Plan to Tear up the Rules-Based International Order
Jeffrey St. Clair
Roaming Charges: the Chickenhawks Have Finally Come Back Home to Roost!
David Rosen
As the Capitalist World Turns: From Empire to Imperialism to Globalization?
Jonah Raskin
Green Capitalism Rears Its Head at Global Climate Action Summit
James Munson
On Climate, the Centrists are the Deplorables
Robert Hunziker
Is Paris 2015 Already Underwater?
Arshad Khan
Will Their Ever be Justice for Rohingya Muslims?
Jill Richardson
Why Women Don’t Report Sexual Assault
Dave Clennon
A Victory for Historical Accuracy and the Peace Movement: Not One Emmy for Ken Burns and “The Vietnam War”
W. T. Whitney
US Harasses Cuba Amid Mysterious Circumstances
Nathan Kalman-Lamb
Things That Make Sports Fans Uncomfortable
George Capaccio
Iran: “Snapping Back” Sanctions and the Threat of War
Kenneth Surin
Brexit is Coming, But Which Will It Be?
Louis Proyect
Moore’s “Fahrenheit 11/9”: Entertaining Film, Crappy Politics
Ramzy Baroud
Why Israel Demolishes: Khan Al-Ahmar as Representation of Greater Genocide
Ben Dangl
The Zapatistas’ Dignified Rage: Revolutionary Theories and Anticapitalist Dreams of Subcommandante Marcos
Ron Jacobs
Faith, Madness, or Death
Bill Glahn
Crime Comes Knocking
Terry Heaton
Pat Robertson’s Hurricane “Miracle”
Dave Lindorff
In Montgomery County PA, It’s Often a Jury of White People
Louis Yako
From Citizens to Customers: the Corporate Customer Service Culture in America 
William Boardman
The Shame of Dianne Feinstein, the Courage of Christine Blasey Ford 
Ernie Niemi
Logging and Climate Change: Oregon is Appalachia and Timber is Our Coal
Jessicah Pierre
Nike Says “Believe in Something,” But Can It Sacrifice Something, Too?
Paul Fitzgerald - Elizabeth Gould
Weaponized Dreams? The Curious Case of Robert Moss
Olivia Alperstein
An Environmental 9/11: the EPA’s Gutting of Methane Regulations
FacebookTwitterGoogle+RedditEmail